NYSE Euronext's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: NYSE Euronext (NYX)

NYSE Euronext (NYSE:NYX)

Q1 2012 Earnings Call

April 30, 2012 8:00 am ET


Stephen Davidson - Vice President of Investor Relations

Duncan L. Niederauer - Chief Executive Officer and Director

Michael Geltzeiler - Chief Financial Officer and Group Executive Vice President


Howard Chen - Crédit Suisse AG, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Brian Bedell - ISI Group Inc., Research Division

Alex Kramm - UBS Investment Bank, Research Division


Good day, ladies and gentlemen, and thank you. And welcome to the First Quarter 2012 NYSE Euronext Earnings Conference Call. My name is Chanel, and I'll be your operator today. [Operator Instructions] I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.

Stephen Davidson

Thanks, Chanel. Good morning, and welcome to the NYSE Euronext First Quarter 2012 Earnings Conference Call. Before I introduce today's speakers, let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext's current expectations and involve risk and uncertainties that could cause NYSE Euronext's actual results to differ materially from those in the statements.

These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier today. We believe that these tables provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.

Duncan Niederauer, Chief Executive Officer, will do the highlights for the quarter, update you on the macro environment and our new initiatives, and then close by highlighting the momentum we are seeing in listings and the progress we have made on Project 14. Michael Geltzeiler, Chief Financial Officer, will then review the financial results for the quarter. We will then open the line for your questions. We are incorporating slides for the call today, which are available for viewing on our website, and Duncan and Mike will refer to the slides during their remarks.

With that, let me turn it over to Duncan.

Duncan L. Niederauer

Thanks, Stephen. Good morning, everybody. Thanks for joining the call today. Just to preview it a bit to start out. Given that we did our Investor Day at the beginning of April, and then we just had the Annual Shareholder Meeting just a few days ago, I think since we've communicated so much recently, I think we can tell by the attendance on the call today, it's a little lighter than usual as well. We're going to keep our prepared remarks shorter than we normally do, figuring there's not a lot of new news in here. We'll leave the usual time that we leave for questions and then our expectation would be we'd have everybody kind of back to work by about 8:45 or so.

From our point of view, the story of the first quarter is what we've done already and what we're continuing to do to set the table for growth. So that when the challenging market conditions we now face revert to what we believe are more historical norms, we are positioned to not only capture the revenue that comes with that recovery, but to enhance our overall performance with new streams of revenues in a lower cost and reduced share count environment, which will magnify the operating leverage of the model.

We're doing this by executing our plans through Project 14 as we discussed at the Investor Day in early April. The actions that we are taking with this comprehensive initiative will drive a step-up in the underlying earnings power of the company, which we believe will become evident in a more normal environment in 2013 and 2014.

So with that as a backdrop, let's turn to Slide 3. For the quarter, we recorded earnings per share of $0.47 per share on net revenue of $601 million, down from $0.68 per share on $679 million in the prior-year period. Cost discipline, a hallmark of our team, continued in the quarter with cost down 3% year-over-year on a constant dollar and constant portfolio basis. We were #1 in listings globally for the fifth consecutive quarter, and our share of technology IPOs in the U.S. year-to-date is approximately 60%.

In summary, we knew and expected this would be a challenging quarter for us given the difficult environment. We are seeing modest improvement in economic indicators around the world, which would generally bode well for our business. But unfortunately, we are still waiting for signs that trading volumes will return to the levels we have witnessed in 2010 and 2011.

Please turn to Slide 4. This is a slide that we've used in other meetings; I think at the Investor Day as well. And it tries to depict the various crosswinds in the economic environment and the macro environment in which we're operating our business. With a focus on what we can control and a solid execution of our strategy, we are optimistic that we can navigate through these in a way that will actually provide us with some opportunities.

First in terms of derivatives reform. We have always supported regulatory efforts that bring transparency and better risk management to markets. We support these efforts because it makes sense for our markets and will significantly reduce systemic risk. Both EMIR in Europe and Dodd-Frank here in the U.S. encourage derivatives to move toward a more centrally cleared environment, and we have been actively involved in the dialogue in both regions.

The overhang of these reforms, however, is causing some uncertainty for our clients with regard to their business models. And as a result, they continue to underinvest. As customers to look -- as customers look to reduce costs, however, we are well positioned to serve as a major provider of outsourced trading infrastructure. With capital becoming increasingly scarce, capitally efficient clearinghouses, like NYPC, are also poised to offer a lot of value.

Next, we are operating in a low volatility, low-growth environment, driven by the lingering effects of the financial crisis, which is keeping rates at or near 0. This type of environment dampens volumes and results in even greater internalization in the U.S. cash markets. On the flip side though, more stable markets mean companies are better able to raise capital in the public markets, which is good for our listings business. It also highlights the benefits of a diversified revenue model.

Uncertainty continues to also persist around the euro, and that is naturally taking a toll on investment and growth in Europe. However, the silver lining here is that spikes in volatility drive volume and the evolving landscape may also present new product opportunities for us in cash and derivatives. If April is any indication, volumes have already picked up the first -- in the first half of April and throughout the month.

Lastly, while the low interest rate environment is conducive to balance sheet repair, our European derivatives business, which is focused on the short end of the yield curve is at a cyclical low, and market participants see more opportunities to trade other interest rate underliers. That said, our derivatives trading volumes in Europe are holding up reasonably well and when the prospects for rate changes emerge, we should return to a more normal growth trajectory.

Please turn to Slide 5. On Slide 5, we highlight a number of the growth initiatives that we are in the process of executing. This is a chart we showed at Investor Day. During the quarter, we provided you with our approach to building out clearing, announced Project Trinity and launched the new initiative in rates for our European derivatives business. I'm not going to go through each of the them as the team went through these a few weeks ago in a lot of detail, but we will be continuing to update you on these initiatives in earnings calls in the future.

I would, however, like to comment on our technology services business. While we continue to see our technology business as a growth driver, we have experienced some dampening of demand recently. The spending growth rate in the technology sector has slowed more than we anticipated, which has resulted in lower technology sales in the first quarter. This is partly due to geoeconomic factors, but also uncertainty over the future regulatory landscape.

Our clients are demanding that major initiatives which they undertake show payback in 12 to 18 months and cost no more than their current operating and capital expenses to implement. In other words, no running costs. Financial engineering is becoming a major part of deal structures now.

Decision making for many of our clients and prospects has also become more complex, and as a result, takes more time. And when you do get close to a deal, there's a lot more parties involved in signing off. New initiatives have slowed, and our customers are focused on cutting costs from existing infrastructure, such as reducing the number of vendors and cutting costs from existing vendor spend, and we are seeing this in the reduction in unused cabinet inventory in both our Basildon and Mahwah data centers.

The silver lining, we hope, to all of this is that these issues support a managed service model that we have created with our business over the last 12 to 18 months. We have hit a temporary air pocket, which we will have to work through, but we are confident that we will return to double-digit growth in revenue once the environment stabilizes.

Why are we confident? We have several key deals in the hopper, and we are seeing some nice developments as a result of our acquisition of a 25% stake in Fixnetix, where we are building a joint product pipeline. Other recent deals include a hosted matching engine for a global investment bank, a recently announced partnership with the Americas Trading Group to provide access to South American markets and our agreement with the Hong Kong exchanges and clearing to improve our customers' market data experience by delivering market data for all securities and derivatives traded by Hong Kong in a common message format.

Please turn to Slide 6. On Slide 6, we highlight the progress that we have been making in technology IPOs over the last few years and the strong pipeline for deals already on file with NYSE language. One of the areas on which we have been focused and has been a growth driver for us on the new listings front is emerging growth companies in the technology arena. In the early 2000s, we had less than a 10% market share of the technology space. In 2008, we had about 20%, and we have since grown our market share to approximately 60% year-to-date in 2012, which includes success more recently with companies like Yelp, LinkedIn, Pandora and Millennial Media.

There is also currently a strong pipeline with 118 IPOs on file with NYSE language, adding up to roughly $20 billion in proceeds, which includes the likes of Avaya, Service Now, Silver Spring Networks and MobiTV. While we have seen European market concerns creep back into the market, we still believe that the IPO window is open, and we will see more companies come to market in both the U.S. and Europe.

Lastly for me before I turn it over to Mike, please turn to Slide 7. Consider this the first of many updates to come on what we call Project 14. We're purposely calling this project, Project 14, because it is not about this quarter or even this year. It is about the time between now and 2014. Our goal is to spent this year, next year and the year after executing against 3 pillars: targeted growth, cost efficiency and strategic deployment of capital, so that by the end of 2014, we are in an even better position to compete and win in our core businesses.

Larry and Mike will be spearheading the cost-efficiency part of this project, and we will be as transparent as we're able to, to allow you to track our progress, so nobody will have to guess how far along we are in this program. We are going to be focused on a series of short, medium and long-term actions around our technology platforms, streamlining our organization and optimizing how we do business. We will divest underperforming assets, and we will build out clearing, both of which we believe will provide us with incremental revenue that Mike will discuss in more detail, but will also allow us to reduce cost.

So in the 4 weeks since we first announced the program, how are we doing? On the growth side of the ledger, we have lots of initiatives that are in progress, which we will believe -- which we believe will yield return on our investment regardless of how the market environment evolves. Our focus is not only on executing these initiatives shown in the growth bucket, but also seeking additional opportunity to create value.

On the efficiency front, our costs are down and following our closure of SecFinex, we finalized the unwind of NYSE Blue. This is not meant to be a verdict on the environmental space, just simply a recognition that this market will take much longer to develop than we or our shareholders are willing to wait.

On the capital front, I think we can check a couple of boxes, and it is nice to see that several of our peers are taking a page from our playbook by adding to their buybacks or establishing or increasing their dividends. Lastly, we bought back $125 million of stock in the quarter. Our CapEx was $43 million, in line with our full year guidance of about $200 million, and we announced plans to reevaluate several more of our minority investments.

With that, let me now turn the call over to Mike for a review of our financial results.

Michael Geltzeiler

Thanks, Duncan, and good morning. Slide 8 provides comparative GAAP results in the first quarter of 2012. This quarter, there are several reconciling items between our GAAP EPS of $0.34 per share and our non-GAAP EPS of $0.47 per share.

In the quarter, we reported a $31 million charge for merger and exit expenses, which included $16 million related to final fees on the DB merger. Severance and exit costs were higher in the quarter as we launched our Project 14 efficiency effort. Our GAAP results also reflect the impact of several discrete tax items related to a favorable tax settlement with U.K. tax authorities, which was more than offset by a noncash expense related to changes from the legal entities in the U.S. Our review of our financial results from this point forward will exclude the impact of merger expenses and exit costs and the discrete tax items.

Slide 9 provides a more detailed look at our financial results for the quarter. As we saw this quarter, operating leverage cuts both ways, and that is really the story for the quarter. Lower volatility in volumes in all our venues, but particularly European derivatives, coupled with a weaker euro have negatively impacted revenues versus Q1 2011 and last quarter.

Revenues of $601 million for the quarter were down 11% year-over-year and 4% quarter-on-quarter. Volumes were down an average of 17% year-over-year, and were down an average of 7% from the traditionally slower fourth quarter period. While we continue to make headway in diversifying our business model, trading-related net revenue still makes up approximately 50% of our revenue base. And this revenue stream was down $88 million or 25% year-over-year.

Revenue from other streams were up $10 million or 3% versus Q1 prior year. Our costs were lower $10 million or 2% for the quarter, the effective tax rate was 25% for the quarter, down from 26% in the prior year. The decline in the effective tax rate year-over-year was due to the aforementioned tax changes in the U.K. and U.S. And our diluted share count was reduced 3 million shares to 259 million shares this quarter. The period-end outstanding share count was 255 million.

Slide 10 provides the consolidated and segment results on a currency neutral basis. The U.S. dollar strengthened this quarter versus prior year for both the euro and the British pound. For the first quarter, 45% of our net revenue was denominated in either euros or pounds and 55% in U.S. dollars. Currency impact on net revenue for the quarter was negative $9 million versus prior year and an unfavorable $5 million versus the previous quarter. Foreign exchange contributed an unfavorable $4 million to operating income this quarter versus prior year.

On a currency neutral basis, first quarter net revenues were down 10% and operating income decreased 24% versus the first quarter of 2011. Operationally, revenues for our Derivatives and Cash Trading and Listings increased 24% and 6%, respectively. Our Technology segment revenues were up an adjusted 6%.

Slides 11 and 12 detail the financial performance for our Derivatives segment. Derivatives accounted for 29% of our consolidated net revenues and 35% of our operating income in the first quarter due to the decrease of $60 million in net revenues year-over-year principally driven by lower European derivatives trading volume. Volumes are weakest in the rates area, while equity, future and option volumes were also impacted by the underlying reduction in equity trading.

Open interest has moved higher from year end 2011 levels, but is 17% lower than Q1 2011. We are at cyclical lows for this business, which is geared to the short end of the yield curve, but we are confident that when expectations for rate increases escalate, we will return to a growth trajectory for this business.

Revenue capture for the quarter was lower for NYSE Liffe versus both Q4 and prior-year first quarter. Decline year-over-year and quarter-over-quarter was principally due to a shift in volume mix. Specifically, lower volumes and higher capture, short-term interest rate products, as well as modified pricing for the trading of individual equity options and index futures and options on the NYSE Liffe Amsterdam and Belgium.

Capture for the competitive U.S. options business was lower year-over-year, but stable on a linked-quarter basis. Higher percentage of dividend strategy trades over Arca, with fee caps was offset by a stronger capture on NYSE Amex Options.

NYSE Amex Options is on track for a record monthly market share in April of 16%. A clearing build is in full swing with a target date for fully in-sourcing Liffe Clear by Q3 2013. This is expected to save an annualized $30 million. Additionally, moving continental clearing to Liffe Clear is targeted for Q1 2014. This move will enable us to realize approximately $40 million in annual revenues at traditional derivative clearinghouse margins.

Similarly, Slide 13 and 14 show the financial performance for our Cash Trading and Listings segment. Cash Trading and Listings accounted for 51% of our consolidated net revenues and 53% of our operating income in the first quarter. Cash Trading and Listings net revenue was $304 million in the first quarter of 2012, down 7% versus the prior-year period and down 3% compared to the fourth quarter of 2011. The decrease was principally due to lower volumes, driven by a lower consolidated tape and an increase in off-exchange trading in the U.S.

European cash ADV of 1.6 million transactions decreased 12% from the first quarter 2011 levels, but was in line with fourth quarter 2011. For April 2012, we have seen a dramatic improvement in European cash volumes, with ADV rising nearly 20% from Q1. In U.S. cash equities, volumes decreased 23% to 1.8 billion shares compared to prior year and decreased 16% from fourth quarter 2011 levels. April month-to-date U.S. cash trading volumes remain at depressed levels.

Non-exchange traded share or TRX share has increased several percentage points year-to-date March to approximately 34% of the U.S. cash trading due to lower volatility and has impacted our market share in the U.S. cash, which was down in Q1 both against fourth quarter 2011 and first quarter 2011 levels. Market share in Europe has stabilized for the last few quarters at 65% in our 4 European markets compared to 70% in the prior year. European share figures exclude off-exchange trading volume.

Revenue capture for the U.S. cash increased to $0.042 per 100 shares handled for Q1, well above the $0.037 recorded in the first quarter of 2011 and above the $0.039 in Q4. Revenue capture for European cash decreased to $0.57 from $0.67 in the first quarter of 2011 and was down slightly from the $0.58 in the fourth quarter of 2011. 14% decline in capture year-over-year was driven primarily by the overall decline in value traded and a weaker euro, partially offset by higher average basis point stake.

Slide 15 details the financial performance for our Information Services and Technology Solutions segment. Information and Technology Solutions accounted for 20% of our net revenue and 12% of our operating income in the first quarter of 2012. Information Service and Technology Solutions revenue was $121 million in the first quarter, an increase of $5 million or 4% from Q1 prior year. At constant exchange rates, revenues were up 6% on prior year.

Software sales, in particular, are traditionally weak in quarter 1 versus quarter 4, but in 2012, the economic environment accentuated this trend. While the Q1 results are below our expectations for this business, they reflect a very challenging environment for financial technology spending in the industry. Clients are delaying technology decisions, reducing staff levels, which impacts market data revenues, and the lower volatility and trading environment is impacting co-location and connectivity revenues. We expect this trend to continue, at least through quarter 2. Medium term, we remain convinced that we can resume double-digit top line growth. We have a solid pipeline of managed service opportunities and new product offerings.

Slide 16 provides a reconciliation of our underlying cost base and details investment spending for the quarter. This format also provides a comparison to our full year cost guidance. This will enable investors to track our realization of the $250 million in annualized savings we committed to at the Investor Day as part of Project 14.

Current period expenses of $405 million are rebased to currency fee rates for our 2012 cost guidance, resulting in a rebased cost base in 2001 -- Q1 2012 of $409 million. Expenses totaled $8 million in the 3 growth initiatives during the quarter. This translates to our first quarter core expenses of $401 million.

Our cost guidance for core expenses is a range between $1,580 million and $1,600 million; this represents a projected 25% savings on the $250 million Project 14 goal. Using our traditional methodology of measuring expenses, year-over-year on a constant dollar, constant portfolio basis, costs were down $12 million or 3%.

Looking to Q2, the April divestiture of NYSE Blue should save us $5 million in costs and $1 million in operating losses per quarter. Additionally, we expect to ramp up spending for our clearing and contract for differences initiatives.

Slide 17 details our cash and debt position as of March 31, 2012. Our cash and debt positions were similar to Q4 2011, with gross debt at $2.1 billion. This despite a first quarter where we paid annual bonuses, repurchased $125 million of stock and dispersed accumulated Section 31 fees. Although debt levels were constant, our debt-to-EBITDA leverage ratio increased to 2x reflecting a weak Q1 for EBITDA.

Capital expenditures were $43 million in the quarter, compared to $35 million in the prior year quarter. First half of the year is our strongest period for free cash flow generation as result of billings for annual listing fees. We executed $125 million in stock repurchases in the first quarter, repurchasing 4.3 million shares at an average price of $29.73. Last week, the board declared a $0.30 quarterly cash dividend for the second quarter of 2012, which is payable on June 29.

Now, I'd like to turn the call back to Duncan for closing remarks.

Duncan L. Niederauer

Thanks, Mike. So just to wrap up, and then we'll, as I said, we'll leave a bit normal time for some questions. And then we'll -- we've got several queued up already, so we'll take them as many as we can.

So in conclusion, despite the challenging environment, we're pleased with the progress we're making on our strategy to create a global capital markets community that will empower our clients to innovate and collaborate. As we move through 2012, we are not sitting still waiting for the operating environment to improve. As we said at our Investor Day, we believe there is further value that can be unlocked by having these businesses under 1 umbrella. We are focusing on unlocking that potential, which is what Project 14 is all about.

We're focusing on the leverage within our control to execute against our community strategy and drive the step-up in our underlying earnings per share growth between now and 2014. This will be accomplished, as we've said a few times today, through a mix of targeted revenue-generating initiatives, accelerated cost-efficiency efforts and strategic capital deployment.

With that, we'll open the line for your questions, and thanks for listening.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Howard Chen from Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

Duncan, just on the technology business and the delayed decision making you're speaking to, can you quantify that in terms of backlogs as you guys all see it? And second, how long would this take to – would it need to persist for you to kind of rethink that $1 billion target and the spending you've all allocated to that?

Duncan L. Niederauer

Look, 1 quarter does not make a trend. We realize that a lot of our big customers are -- who are the most obvious users of the -- of some of the hosted and managed services are going through their own business reinvention discussions internally. They're being asked to do that in a macro environment that is impacting them as much as it's impacting us as you can see from some of the results that the integrated investment banks have been publishing. So I don't think -- we are certainly not meeting internally at this point to worry about whether this quarter, after 3 years of pretty consistent growth, is suddenly the beginning of a new trend. I think if this persisted throughout this year, we would have to rethink kind of where we are on that. But we continue to believe there's good bolt-on acquisition opportunities, and there's good organic growth opportunities in that business. And I will say what I've said before, I think that will largely -- the success in that arena will largely define the longer-term success of this company because I think that's where we and others in the industry are going to have to head.


Your next question comes from Niamh Alexander, KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Can I just go back to the clearing because you're on target, you're tracking ahead. But I don't think we had the opportunity to talk at the Analyst Day about the capital requirements because your leverage ratio picked up a little bit this past quarter. Are there some numbers you can share with us just in terms of leverage ratios or interest coverage or certain levels like that, that you've talked to with the rating agencies that you want to be comfortable with? Because you're going to become the guarantor, right, once you fully own the clearing?

Duncan L. Niederauer

Yes, and no. Because yes, all those statements are correct. But if you look at what we've done with NYPC and things like that where our contribution when we started that, remember, we had to fund the guarantee fund there as well. And the issues there are that was a $25 million to $50 million funding. Remember that in our Liffe Clear business, we are doing most of the clearing already. We insource everything but the Treasury and risk management functions. So of course, we will continue to stay focused on that. We'll seed it with whatever's required. We're undertaking the discussions with the FSA now to talk about what they want that to look like. But we don't think that's going to be a huge hit to capital, if indications to date are any barometer. We also continue to think that although our credit rating is obviously well above investment grade, well into investment-grade territory, I continue to believe, as I've mentioned to some of you before, that looking at the credit rating of the parent company of any clearinghouse, I believe is a strange way of thinking about it. If you really get down to it, when the exchanges guarantee fund would be tapped is so far down the risk waterfall that I continue to say, and I can't say that anybody's listening, but I'm going to continue to say it anyway, that the right way to think about the credit exposure in any clearinghouse is really a weighted average of all the clearinghouse's participants. I think that's much more important. And I think we're much more focused with the regulators that we're talking to about the real-time risk controls in the clearinghouse and how to manage all of that. I think that's much more important than a, the credit rating of the topco; and b, whether we put in $25 million, $50 million or $100 million in a guarantee fund, those are interesting facts, but not terribly relevant as compared to the other stuff. So I'll do some more homework into that with my derivatives specialists and if the answer they give me is quite different than what I just shared, we'll make sure we circulate something on that.


Your next question comes from Rich Repetto with Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

I know this is small part of revenues now, but I was surprised on the U.S. cash equities because a lot has been talked about the market share declining. But your revenue capture actually went up 8%, your peers' went down 10%. So I guess the question is the dynamics of what was going on, we know stuff moved to the TRF. But could you explain a little bit more what was going on with your revenue capture going up versus the peer going down, and actually, your revenue declined less than your peer as well?

Duncan L. Niederauer

Right, so it's a good question, Rich. Larry is out of the office today, so I'll do my best to answer that. And then if Larry's got more details or Joe does, we'll ask them to follow-up with you and others on this. And Mike may have something to add as well. But I'll start by saying this: I think we're not going to pat ourselves on the back. I mean everyone can see the market share trends, right? And as I said it in my remarks and as have said to some of you, in a low volatility, low-volume environment, it lends itself more to internalization. And it's not obvious to us why, if volatility and volume stay here, why the dark pool percentage of the market isn't going to stabilize or even increase potentially higher. Now, our view may be relative to some of our competitors is it's fairly simple calculus. You either chase revenue capture and profitability or you chase market share. Obviously in this macro environment, it's difficult to do both. I think some of our competitors have chosen that they believe the optics of market share are better. I think we continue to believe that the market's pretty fragmented. I'm not sure getting a couple of market share points is going to convince anybody that we have a better business model. I think the revenue capture is more important, because our view is, if you return to a more normal volume in volatility environment, we know that volatility is highly correlated with our market share. And I think we've been a little more focused on revenue capture in reasonable ways, where -- which the clients are fully aware of and I think we do that rather than chase market share. Is that -- Mike, anything you want to add to that and then we can have Larry follow up too?

Michael Geltzeiler

Yes, we chose not to chase some of that market share. And there have been some modest price increases on port fees and some other aspects of the business during the quarter. But I think it's mostly what you suggested, us versus the competitors.

Duncan L. Niederauer

And Rich, I'll check with Larry and Joe, who weren't on the call. And if they've got more to add, we'll circulate something to you and your peers.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Okay. Do I get my follow-up, that's what you said in the beginning? My one follow-up question would be...

Duncan L. Niederauer

When did I say that? Okay. Go ahead, Rich.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

In the stated -- I had my guys check the transcript, they said you had a follow-up. But anyway, on IDCG, I guess I'm trying -- the debt to EBITDA sort of jumped up. And I know it's a crazy calculation on the annualized year-to-date. But when you're looking for that excess capital -- and I guess the question is, how do you come out on LCH, given that they've sold -- they're acquiring IDCG and partnering with NASDAQ and they're taking a majority shareholder of LSE. So how would you -- how quickly -- what's your strategy there with LCH?

Duncan L. Niederauer

Okay. I'm going to pretend that was question, Rich, and I'll do my best to answer it, so I will follow up later. Here's what I think is going on. So let's just have it all pretty clear. So we already partnered with DTC and NYPC. And I think we were hopeful that the 1 future arena that the NYSE DTC partnership at NYPC could explore was having already coupled euro-dollar futures and the cash bonds to kind of create a more capitally efficient clearinghouse, I think the next obvious leg to that stool will be to try to figure out a way to get into interest rate swaps. It's no secret to anybody on this call that LCH's SwapClear subsidiary, which is more or less governed by the important banks, who are the liquidity providers in the swaps market, has been looking for a partner on U.S. soil for that for quite some time. And it's also no secret that they are the dominant force in the interest rate swap business. So our view was -- and we've announced that with Project Trinity, which we referenced at the Investor Day. The idea is LCH picks up basically the license by buying IDCG from NASDAQ. I don't view that as a partnering strategy, I view that as them buying the license to actually partner with us and DTC, so now we can bring that third leg of the stool into NYPC over time. So that's what Project Trinity is all about. At the same time on the other side of the pond, LSE is going to acquire a majority share of LCH assuming that deal gets approved sometime this year or next year. The timing on them getting approval will more or less coincide with us finishing the vertical integration of our own clearinghouse. So remember, we insourced, as I said earlier, all but the treasury and risk management functions. That's what we are working on, that's consistent with the press release that we put out a few months ago about our timetable on all that. So roughly this time next year, maybe a little later, we will be completing that migration into the clearinghouse. So we will have our own clearinghouse, LSE will own a majority of LCH, and we and LCH and DTC will hopefully by then, be partnering on that 3-legged stool I referenced earlier, so that we'll be able to clear interest rate futures, the cash underliers, as well as interest rate swaps. And I think that will be an unprecedented cross-margining opportunity as well. So hopefully that addresses most of what you were asking about.

Michael Geltzeiler

And just, Rich, one quick thing to add, because it's come up twice now. I mean on the debt to EBITDA, I mean all we're doing when we went to 1.6x to 2x, we took the first quarter EBITDA, multiplied it by 4, because that's sort of how the agencies look at things. It's -- so the one-time bump is clearly moving from 2011 where EBITDA was higher to a pretty weak first quarter.

Duncan L. Niederauer

And we have plenty of capital flexibility to fund the -- to put the funds that are necessary in the clearinghouses that we'll be operating. So no worries on that.


Your next question comes from Roger Freeman, Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Just on the technology solutions revenues. Just the sequential decline, you mentioned a few things during the comments. I think one of it was being, taking down some of the unused space in the data centers. I guess I'm just trying to get at what drove the sequential decline. Was it really just on the margin, sort of cost betting on the side of the dealers as opposed to any significant contracts rolling of? And then the -- if you look at that total revenue part, how much of it is subject to short-term cancellation?

Michael Geltzeiler

I'll address that, Roger. So I mean the first thing is, I know we've been only at this a couple of years. But the first quarter is always weak relative to the fourth quarter in almost any software business, and our business, no different. So I think the sequential review always tends to suffer. Now in a couple previous years, we had some offsetting good guys in the first quarter that made the first quarter results, maybe look more robust. The principle reason why moving sequentially from the fourth quarter, first quarter is lower software, which would happen in almost in a year. I think what we talked on top of that is with the lower volumes, one of the other revenue boosts we've been getting is people purchasing more cabinets, more safety connectivity, et cetera. And clearly in the lower volume environment, we didn't say there were a lot of cancellations, what we were saying is there is some excess capacity. And clearly, we're not getting incremental sales when -- in this sort of volume environment. So it's really those 2 things. But I think again, we had a pretty robust fourth quarter for software sales. And the first quarter always is weaker, this particular quarter was even a little weaker than normal because of some of the things Duncan and I mentioned earlier.


Your next question comes from the line of Brian Bedell, ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Duncan, just a question on high-frequency trading. To what extent do you think lower high-frequency participation this quarter impacts your results versus last quarter? Obviously, in a weaker volatile -- lower volatile environment, HFT, typically declined. But what -- to what extent do you think it had an impact, not only on trading, but also some of the recurring revenue streams? And then going forward, to what extent do you think it might be structurally lower? So if we do get an improvement in volatility down the road, do you think it will snap back to say, 2011 levels in terms of...

Duncan L. Niederauer

Yes, it's something we think about here a lot, Brian. And you try to have as much insight as into it as you can, given the fact that we don't have all the information. I do think that the confluence of factors, including lower volatility, lower volumes, the high-frequency community diversifying into other asset classes and geographies not being as reliant on the U.S. And frankly, as we've articulated, I think publicly, a couple of times, the regulatory -- the potential for more regulatory scrutiny and in the interim, a lot of politics, if I can use that word, around this subject, some of the high-frequency folks we talk to are simply saying, "Look, if there's going to be that much focus on it, when the majority of what we do is liquidity provision, I think whether it's an unintended consequence or not, some of the rhetoric from the regulators and politicians may be leading the high-frequency community to think about a lot of other alternatives and maybe, in fact, accelerating their move to either a, other asset classes and geographies, or b, some of the more lightly regulated liquidity pools, right? I mean, if you and I were high-frequency folks and every day, we're reading headlines in the paper, informed or uninformed, that say, we're going to be bringing a lot more scrutiny to bear. It is a rational decision to go look at other market opportunities or to trade in the less regulated markets. And I actually think that part of the increase in dark pool liquidity is coming from a change in demographics there as well because I don't think the high-frequency guys have left the U.S. market entirely. But I do think they've shifted some of their volume from the regulated to the less regulated markets, which you have to say is a rational decision on their part. So that's as much information as we've got at the moment. Some of that is obviously speculative. And again, as I said to Rich or someone earlier about their question, I can have Larry and Joe do a little more work in that, and if they have some different views, I'll encourage them to share it with you guys. We'll take 1 more, guys, and then let everyone get back to work, okay?


Your final question comes from Alex Kramm, UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just a quick one on Euronext. Mike, you mentioned the strong April volumes so far. Do you think this is just driven by some of the uncertainties in volatility in Europe? Or is there some sort of mix shift going on in terms of users that we should think about when we think about pricing in the second quarter?

Michael Geltzeiler

Yes, I mean we had no pricing changes. So I think it is volatility. I mean, and it's hard to say any one thing. But I think we definitely are seeing with some of the European issues coming on the table again, some concerns, elections happening as we see. I think we're seeing a pickup in trading really starting in the beginning of the month. And it's been pretty consistent through the month of April. So it's again, volatility is a funny thing. You never really know when it turns on or off, but we're not long-term concerned. But I think we've been through sort of a rough patch the last 5 months or so. And this is the 1 market we're seeing a little more volatility. We didn't see it in the U.S., but we're seeing it in Europe.

Duncan L. Niederauer

Okay, guys, as always, we thank you. Mike and Stephen and the team will be available for any follow-ups you'd like to do one-on-one. And Larry and Joe will fill in any holes that I left in some of the answers to questions that were more specific to the demographics in the U.S. market. So thanks for your attention. And we'll talk to all of you soon. Have a great day.


Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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